Japan's new conservative Prime Minister Shinzo Abe has named a Cabinet dominated by close allies as he returns to office pledging to revive a sluggish economy and get tough on territorial challenges from neighboring powers.

Mr. Abe and his Cabinet were sworn in by Emperor Akihito on Wednesday, shortly after winning votes of confidence in both houses of the Japanese parliament. His Liberal Democratic Party and its small ally, New Komeito party, won a two-thirds majority in the influential lower house in a December 16 election, ousting the left-leaning Democratic Party of Japan after three years in power.

Mr. Abe first served as prime minister from 2006 to 2007, when he stepped down for health reasons after a scandal-plagued term. He appointed several veterans of that administration to the new Cabinet, with the key post of finance minister going to Taro Aso, his former chief diplomat who went on to serve as prime minister from 2008 to 2009.

At a news conference late Wednesday, Mr. Abe promised bold and flexible steps to fix the Japanese economy. One of his top priorities is reversing deflation by pressing the Bank of Japan to make it cheaper to borrow money. He also wants to boost economic growth through more government spending on public infrastructure.

The post of foreign minister went to Fumio Kishida, who served in the first Abe Cabinet as a minister in charge of issues related to Okinawa, the island that hosts the bulk of U.S. forces in Japan. The new defense minister is Itsunori Onodera, who was a vice foreign minister during Mr. Abe's previous term.

On foreign policy, Mr. Abe said Japan must return to the kind of diplomacy that “protects our sovereign interests.” He has advocated a tougher approach than the previous government to affirming Japanese territorial claims to island chains claimed by China and South Korea. Mr. Abe also has called for strengthening Tokyo's military alliance with the United States.

Japanese-Chinese tensions escalated this year as the two countries each tried to assert sovereignty over uninhabited islets in the East China Sea.

Chinese foreign ministry spokeswoman Hua Chunying said Beijing hopes Mr. Abe will make efforts to “bring relations back on track.” Speaking Wednesday, she also said China is willing to work with Japan for a “healthy and stable development of relations.”

Chinese state-run news agency Xinhua published a commentary saying Japan's export-oriented economy will find it hard to expand overseas trade if it chooses to “play with fire” in handling disputes with China, South Korea and Russia.